Tim’s Tax News on the Tenth – September 2023
Tax Court Sides with IRS on Rental Expense and Marketing Expense That Taxpayers Could Not Support as Actual, Ordinary, or Necessary
On August 14, 2023 the U.S. Tax Court rendered a decision in Gary J. Sinopoli et al v Commissioner of IRS (T.C. Memo. 2023-105) disallowing taxpayers aggressive tax planning strategies as to rental expense and marketing expenses.
The case involved two Mississippi-based anesthesiologists and an orthopedic representative. The three were equal owners of Planet LA, (“Planet”) an LLC that elected S Corp status. Planet was a franchisee of Planet Fitness, and in the years in question, it ran between three and five Planet Fitness gyms. During this time the three owners were busy and wanted to take advantage of Code Section 280A(g) which excludes rental income if the rental of property for the year was under 15 days. Therefore, Planet had rental expenses for the three owners as follows:
| Year | Owner 1 | Owner 2 | Owner 3 | Total |
|---|---|---|---|---|
| 2015 | 30,000 | 36,000 | 30,400 | 96,400 |
| 2016 | 40,000 | 33,000 | 40,500 | 113,500 |
| 2017 | 27,000 | 27,000 | 27,000 | 81,000 |
Unfortunately, for the taxpayers, they could not substantiate having more than 12 meetings in a year. Nor could they substantiate why the prevailing rental rate of about $500.00 per day was not charged. Therefore, the IRS allowed $6,000.00 per year and disallowed the excess amount – the Tax Court agreed with the IRS.
The three owners also tried lowering Planet’s taxable income by using a newly created C-corporation of the three owners to handle Planet’s marketing. The IRS auditor’s review of the new company’s work was merely to pay Planet’s local advertisers and did nothing else marketing-related. Therefore, the IRS disallowed the excess paid to the C-corporation. The amount at issue was as follows:
| Year | Planet's Expenses | Marketing Fees | Paid to Local Advertisers | Disallowed |
|---|---|---|---|---|
| 2015 | 676,544 | 483,000 | 202,757 | 280,243 |
| 2016 | 941,736 | 740,015 | 303,282 | 436,733 |
| 2017 | 634,680 | 506,260 | 254,092 | 252,168 |
Again, the Tax Court ruled in favor of the IRS and against the taxpayers.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 30 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.
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